A stock option is an investment security that gives you the right, but not the obligation, to purchase or sell a specified number of shares of stock at a specified price for a specified period of time. Buying and selling stock options has tax consequences, just like most other securities transactions. If you exercise your stock options you will need to know your tax basis for the transaction to determine your tax consequences.

1. Determine the price you paid for each stock option. Multiply the price per option by the number of options you purchased. Add the result to any commission you paid to your investment broker. The sum is your cost basis for your options.

2. Determine the price you paid for the stock when you exercised your stock options. Multiply the strike price of the options by the number options you exercised. Add the result to any commission you paid to your investment broker. The sum is the cost basis for the underlying security.

3. Add the cost basis of your options to the cost basis of the underlying security. The sum is the cost basis of your investment for tax purposes. You can determine the cost basis of each individual share of stock by dividing the sum by the total number of shares you acquired by exercising the options.

4. Subtract any commission you paid from the sale price of the stock to get your final sales price. Subtract your cost basis for tax purposes from your final sales price. If the result is a positive number you will have a gain. If the result is a negative number you will have a loss. The gain or loss may be long term or short term for tax purposes, depending on how long you owned the security.

#### Tip

- You will not incur any tax liability until you sell the stock.

#### Warning

- Trading stock options involves risk. You may lose some or all of your investment.

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